Question 1

If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase.

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Question 2

The number of days' sales in receivables is one means of expressing the relationship between average daily sales and accounts receivable.

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Question 3

The return on total assets measures the profitability of total assets, without considering how the assets are financed.

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Question 4

In computing the asset turnover ratio, long-term investments are excluded from average total assets.

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Question 5

Solvency analysis focuses on the ability of a business to pay its current and noncurrent liabilities.

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Question 6

Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in inventory management.

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Question 7

When computing the return on common stockholders' equity, preferred stock dividends are subtracted from net income.

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Question 8

A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors.

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Question 9

If a firm has a current ratio of 2, the subsequent collection of a 60-day note receivable on account will cause the ratio to decrease.

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Question 10

A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000; and inventories, $222,500. Current liabilities are $225,000. The current ratio is 2.5.

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Question 11

When the return on total assets is greater than the return on common stockholders' equity, the management of the company has effectively used leverage.

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Question 12

If a company has issued only one class of stock, the earnings per share are determined by dividing net income plus interest expense by the number of shares outstanding.

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Question 13

An increase in the accounts receivable turnover may be due to a change in how credit is granted and/or in collection practices.

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Question 14

The number of days' sales in inventory is one means of expressing the relationship between the cost of goods sold and inventory.

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Question 15

If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been an acceleration in the collection of receivables.

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Question 16

The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio.

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Question 17

The denominator of the return on total assets ratio is the average total assets.

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Question 18

The ratio of fixed assets to long-term liabilities provides a measure of a firm's ability to pay dividends.

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Question 19

A firm selling food should have higher inventory turnover rate than a firm selling office furniture.

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Question 20

In computing the return on total assets, interest expense is subtracted from net income before dividing by average total assets.

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Quiz 14: Financial Statement Analysis